Did everyone here already know that Britain targets 2.5% inflation (see Bloomberg article below)?
And when it falls below that level, they lower interest rates? And:
<<Although consumer and business confidence is beginning to recover the bank said further cuts
would be needed if the currency didn't weaken, to prevent inflation from falling below target. The
government requires the bank to issue a public explanation if inflation varies by more than one
percentage point either side of the target.>>
Their benchmark rate is 2.5% above their targetted inflation rate, and they are lowering rates. The US benchmark is more than 3% above our inflation rate, and we are talking about raising rates. Real rates are high; just keeping them steady is tight enough. Of course, keeping them steady means consistency, and that consistency is probably as much responsible for growth as anything else, as it makes forecasting and planning easier and more accurate. So, if that is correct and if the Fed really wants to slow growth, they should just be unpredictable to accomplish their purpose.
Bank of England Unexpectedly Cuts Benchmark Rate by Quarter Point to 5.00%
By Irena Guzelova
Bank of England Cuts Benchmark Rate a Quarter Point (Update1)
(Adds central bank statement from 1st paragraph.)
London, June 10 (Bloomberg) -- The Bank of England cut its
benchmark interest rate by a surprise quarter percentage point to
5.0 percent after the pound's rise against the euro threatened to
drive inflation below the government's 2.5 percent annual target.
The cut was forecast by only four out of 17 economists
surveyed by Bloomberg News, even though the pound's 8.0 percent
rise against the euro since January has helped reduce import
prices to a thirty-year low and has prevented U.K. businesses
from raising prices at home. The pound has also kept
manufacturing industry in a year-long recession and cut farm
incomes to their lowest level since the 1930s.
''The committee judged that it is now more likely that
inflation will undershoot the 2.5 percent target,'' said the bank
in a statement after the announcement, which prompted a rise in
U.K. bond prices as financial stocks trimmed earlier losses.
Inflation in April was 2.4 percent, below the target. And
companies say the currency's rise will push inflation further
below target by year's end as competition keeps consumer price
pressures at bay.
''Our markets are becoming increasingly competitive,'' said
Ian Prosser, chairman of Bass Plc., a producer and distributor of
beer and soft drinks. ''The low inflationary environment is
restricting price increases.''
Last month, the bank said further cuts would depend on the
level of the pound. Although consumer and business confidence is
beginning to recover the bank said further cuts would be needed
if the currency didn't weaken, to prevent inflation from falling
below target. The government requires the bank to issue a public
explanation if inflation varies by more than one percentage point
either side of the target.
Since the central bank issued that statement, however, the
pound has strengthened a further 1.5 percent against the euro,
and 1.2 percent against a basket of currencies of Britain's main
trading partners. On a trade-weighted basis, the pound has risen
nearly 26 percent since August 1996, when its ascent began.
Today's move comes as voters go to the polls to election
U.K. members of the European Parliament. It is unusual for a
central bank to change monetary policy on an election day. The
action follows reports this week which showed a fall in May
retail sales, and manufacturers still in recession. It cuts the
U.K. benchmark securities repurchase rate to its lowest level
since October 1977 and follows a series of reductions begun last
October that brought the rate down from a 7.5 percent peak.
The pound's strength has driven manufacturing industry, or
25 percent of the overall economy, into a recession from which it
is only just emerging. Farmers, accounting for a further 5
percent, have fared even worse.
''While a recovery seems to be on track, sterling is
throwing a spanner in the works,'' said John Shepperd, an
economist at Dresdner Kleinwort Benson. ''Continued strength may
require further cuts.''
Latest figures show inflation is already falling below
target. A poll of 28 economists taken by the U.K. treasury show
they expect inflation to average 2.3 percent during 1999, and to
decline further by year's end.
Even as economic growth shows some signs of life after
grinding to a halt in the first quarter, economists and the Bank
of England don't expect it to reach the long-term annual average
of between 2.25 percent and 2.5 percent. Economists surveyed by
the treasury expect economic growth to average 0.9 percent this
year and the bank predicts growth of about 1 percent.
''Manufacturers and exporters still remain in severe
difficulty and are facing pressures from the strength of
sterling,'' said Iain McMillan, director of the Confederation of
British Industry in Scotland. ''Though there is more encouraging
news in some of the service sector, there is quite clearly no
sign of inflationary pressures.''
More Rate Cuts
Although the bank expects the pound to decline, sterling's
continued strength is likely to lead to at least one further rate
cut, say economists. ''If sterling remains strong, we judge that
there could be an additional rate cut by year-end,'' said Michael
Dicks, chief European economist at Lehman Brothers.
Even so, today's decision was probably a close call. A
series of surveys indicate cheaper borrowing costs are
encouraging consumers and businesses to spend again. Cheaper
borrowing costs have left the average homeowner just over 150
pounds ($250) better off per month. Last week the Bank of England
said credit card borrowing in April rose to its highest level
since records began six and a half years ago.
Halifax Plc, the U.K.'s major mortgage lender, reported a
2.1 percent rise in house prices in May from April, the sharpest
rise in six years. And the Confederation of British Industry's
monthly survey of stores and supermarkets showed that retailers
expect sales to rebound in June at their strongest annual rate
since May, 1998.
''There is a general feeling that the economic environment
is improving, so we are confident about the second half of the
year,'' said Ian Prosser of Bass.
Minutes of last month's meeting show the Bank of England's
nine-member rate-setting panel was split five to four in favor of
leaving rates unchanged. The dissenting members all favored a
quarter-point reduction. The bank will release the minutes of
today's meeting on June 23. |
